This Article describes the manner in which each Contracting State undertakes to relieve double taxation. The United States uses the foreign tax credit method both under internal law, and by treaty. Under Estonian law, Estonia uses a foreign tax credit for purposes both of the enterprise tax and the personal income tax. Under Article 23 Estonia allows a credit for both taxes.

The United States agrees, in paragraph 1, to allow to its citizens and residents a credit against U.S. tax for income taxes paid or accrued to Estonia. Paragraph 1(a), by referring to ``Estonian tax'', which is the term used in Article 2 (Taxes Covered) to describe Estonia's taxes covered, also makes clear that Estonia's covered taxes are to be treated as income taxes under Article 23, for U.S. foreign tax credit purposes. The provision of a credit for these taxes is based on the Treasury Department's review of Estonia's laws.

The credit under the Convention is allowed in accordance with the provisions and subject to the limitations of U.S. law, as that law may be amended over time, so long as the general principle of this Article (i.e., the allowance of a credit) is retained. Thus, although the Convention provides for a foreign tax credit, the terms of the credit are determined by the provisions, at the time a credit is given, of the U.S. statutory credit.

As indicated, the U.S. credit under the Convention is subject to the various limitations of U.S. law (see Code sections 901 - 908). For example, the credit against U.S. tax generally is limited to the amount of U.S. tax due with respect to net foreign source income within the relevant foreign tax credit limitation category (see Code section 904(a) and (d)), and the dollar amount of the credit is determined in accordance with U.S. currency translation rules (see, e.g., Code section 986). Similarly, U.S. law applies to determine carryover periods for excess credits and other inter-year adjustments. When the alternative minimum tax is due, the alternative minimum tax foreign tax credit generally is limited in accordance with U.S. law to 90 percent of alternative minimum tax liability. Furthermore, nothing in the Convention prevents the limitation of the U.S. credit from being applied on a per-country basis (should internal law be changed), an overall basis, or to particular categories of income (see, e.g., Code section 865(h)).

Subparagraph (b) provides for a deemed-paid credit, consistent with section 902 of the Code, to a U.S. corporation in respect of dividends received from an Estonian corporation, of which the U.S. corporation owns at least 10 percent of the voting stock. This credit is for the tax paid by the Estonian corporation on the profits out of which the dividends are considered paid.

Paragraph 2 contains the rules under which Estonia will avoid double taxation under the Convention. Under subparagraph (a) of this paragraph, Estonia agrees to allow a credit to a resident of Estonia deriving income from the United States for United States tax paid (as defined in subparagraph 1(a) of Article 2), to the extent it is paid in accordance with the Convention. The credit is for the full amount of United States tax, but not to exceed the Estonian tax on that income. The provision does not apply with respect to United States tax imposed on a resident of Estonia by reason of that person's U.S. citizenship, under the saving clause in paragraph 4 of Article 1 (General Scope). The paragraph also specifies that, consistent with paragraph 2 of Article 1, if a more favorable treatment is provided under Estonian law, that treatment will take precedence over the credit provided in the Convention.

Subparagraph (b) provides for a deemed-paid credit to an Estonian corporation in respect of dividends received from a corporation resident in the United States of which the Estonian corporation controls, directly or indirectly, at least 10 percent of the voting power. This credit is for the tax paid by the U.S. corporation on the profits out of which the dividends are paid, in addition to the U.S. tax paid by the Estonian corporation on the dividend itself.

For the purposes of allowing relief from double taxation pursuant to this Article, income derived by a resident of a Contracting State which may be taxed in the other Contracting State in accordance with this Convention (other than solely by reason of citizenship in accordance with paragraph 4 of Article 1 (General Scope)) shall be deemed to arise in that other State. Except as provided in Article 13 (Capital Gains), the preceding sentence is subject to such source rules in the domestic laws of the Contracting States as apply for purposes of limiting the foreign tax credit.

By virtue of the exceptions in subparagraph 5(a) of Article 1 (General Scope), this Article is not subject to the saving clause of paragraph 4 of Article 1. Thus, the United States will allow a credit to its citizens and residents in accordance with the Article, even if such credit were to provide a benefit not available under the Code.